After a turbulent 2022, all eyes in the manufacturing industry—from analysts to experts and industry veterans—are on the 2023 economic forecast and strategy planning. While we have learned many lessons from navigating the ups and downs of the past 12 months, the new year carries unique challenges and economic elements that require our close attention. Specifically, many analysts agree that 2023 will be characterized by a unique “triple squeeze” on performance, which is caused by the combination of persistent high inflation, a challenging and tightening labor market, and further disruptions in the supply chain.
These three factors represent a new set of variables for manufacturing leaders and require a truly innovative approach to digital transformation and process optimization that focuses not only on operational metrics but also on building a scaleable organization.
What is the triple squeeze on performance?
Today’s economic triple squeeze on performance is made up of three main factors: a tightening labor market, persistent high inflation, and global supply chain constraints. While we saw some of these factors in 2022, this year, they will have even stronger impacts on the overall economic situation and needs to be accounted for in any plan for manufacturing operations.
On the tightening labor market
2022 was marked by the Great Resignation that plunged manufacturing into a deep state of labor shortage and brought this issue up to the priority list of many organizations. Unfortunately, the labor shortage in manufacturing is predicted to last well into 2023 with even deepening impacts.
47% of CFOs reported difficulties in finding and hiring enterprise talent. This, in part, is due to the widening skill gap in manufacturing. The industry is expected to experience a shortage of more than 2 million skilled workers in the upcoming years, and even with every manufacturing worker employed, there will still be 35% more job openings than the industry’s capacity to fill them. With 49% of candidates that have accepted a job offer having at least three other offers to consider, manufacturers have to compete not only to attract but also to retain their top talent.
On persistent high inflation
The conversation around high inflation in manufacturing started in the second half of 2022 and definitely expanded in 2023. 90% of CEOs said that inflation would be a significant factor in their region in 2022, which indicated more strategic planning around this element among manufacturing organizations.
On top of that, 69% of CFOs expected to see a significant increase in non-labor input costs this year. This will add another layer of pressure onto organizations’ bottom line and requires more cost-reduction initiatives. Many manufacturers have started their cost-reduction effort in 2022, but they will need a plan for a longer period of high inflation this year.
On constraints of global supply chain
The COVID-19 pandemic forced the manufacturing industry to face a disrupted global supply chain. Unfortunately, with the pandemic seemingly behind us, supply chain disruptions are projected to continue into the future. 48% of CFOs believed that supply chain volatility and shortages would last beyond 2022.
Supply chain constraints will have lasting impacts on the manufacturing industry. According to Gartner, supply chain issues are nearly 3x more likely to lead to customers’ disloyalty than an increase in price. Therefore, planning needs to be made early to decrease risk and increase flexibility to respond to supply chain disruptions.
How is the triple squeeze on performance impacting the manufacturing industry?
The triple squeeze on performance is changing the playing field for manufacturers. While many organizations have implemented tools and solutions to deal with some of these challenges during the pandemic, the same mindset toward digitization will not work now. With the challenges predicted to have long-term impacts, manufacturers need to think about the long game. To tackle the economic triple squeeze, they will need a holistic approach toward digitization that can ensure resilience, agility, and scalability.
High inflation is putting compounding pressure on manufacturers to cut costs. One of the solutions is to automate manual tasks such as data collection with digital tools that can perform the job with higher accuracy. However, that doesn’t mean replacing workers with automation. On the contrary, bringing in digital tools should empower frontline workers to perform more meaningful jobs, such as innovating and making decisions, that can significantly bring up productivity and efficiency.
In 2023, manufacturers need to go beyond operational measures and think about how to utilize their existing assets and resources best to cut down unnecessary costs. This new human-centric approach to implementing digital tools can help manufacturers better utilize their resources. By focusing on building systems that can support workers instead of forcing them to fit into a pre-built one, manufacturers can ensure that they solve the most critical challenges in their operations and stay away from vanity metrics that do not reflect a complete image of the operations, such as OEE. Increases in efficiency and productivity will follow as a natural product of worker empowerment.
By following the human-centric approach to digitization, manufacturers can also better attract and retain their talents. A younger, digital-native generation is entering the workforce expecting to have digital tools readily available to support their daily work. This generation also cares more about the way they work and how their job is making an impact in the organization. Building and expanding your system based on their needs and specific use case will help you control your budget, satisfy your workers and build a competitive advantage in the War for Talent.
Another enduring challenge with traditional manufacturing systems that will become a priority this year is flexibility. Traditional MES are often rigid, with long implementation times, complex requirements, and high costs. They are inflexible and cannot adapt to external changes. With supply chain disruptions being a core element of the triple squeeze on performance this year, manufacturers cannot wait 18 months for the systems to be implemented. They need something that can respond to changes in days or weeks.
While MES is still solving a valid challenge for manufacturers, the way they solve that challenge will need to change. A composable business strategy will be the key to adjusting and adapting to disruption in supply chains and bringing in much-needed flexibility in 2023 and even beyond. The appeal of composability is that it will enable consumers to adapt their applications more quickly by swapping modules as business operations change. It will enable new capabilities to be added to the core of a solution not only from the vendor provider but also from other external sources and even from in-house development using low-code/no-code capabilities. What manufacturers will need to do to control budget and ensure efficiency is gradually modernize existing manufacturing operations apps for an architecture of business-centric modularity or replace them for faster innovation in high-impact areas.
In 2023, manufacturers need to go on the offense instead of waiting for economic hardships to blow over. While the instinct may be to scale down on projects and remain conservative with investments, any investment made now will determine competitive advantages and ensure that companies stay ahead even beyond this triple squeeze. The key is to ensure you’ve got the right solution and implement at the right cost, and the answer is to focus on a composable business strategy and a human-centric approach to digital transformation.
Interested in learning more about how to navigate the triple squeeze on performance in 2023? Watch our on-demand webinar for insights from industry veteran, Erik Mirandette.
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